The re-adjustment in the sale and purchase agreement of Cairn India's shares comes exactly a month after the Group of Ministers, headed by Finance Minister, Mr Pranab Mukherjee, gave a conditional nod to Vedanta's acquisition of Cairn India.

However, with the deal still subject to clearance from the Cabinet Committee on Economic Affairs (CCEA), analysts believe the re-working of the sale and purchase agreement could mean that Vedanta would agree to reduce the royalty burden on ONGC, Cairn India's partner in eight out of the 10 oil blocks that Cairn owns.

Royalty Sharing

“The changes in the agreement mean that the deal size would come down by $628 million. This is a sign that Vedanta would agree to sharing the royalty payment for the Rajasthan blocks. It would be good for ONGC but bad news for Cairn India,” said an analyst.

ONGC holds 30 per cent in the fields operated by Cairn India and yet it pays 100 per cent royalty on production as it is the licensee on the block. The Rajasthan fields had generated revenues worth $3,796 million and of this ONGC's share is $986 million while Cairn India's share is $2,810 million.

ONGC wants royalty paid for the fields to be included in the project cost for purposes of profit petroleum calculation.

The public-sector explorer says that royalty payment can be recovered from sales and its burden can be reduced.

Cairn India's falling share price

“The original agreement valued Cairn India's shares at Rs 405. Today the share price closed at Rs 307.40. So if the original agreement was honoured then Vedanta would be paying a premium of close to Rs 100.

“The falling share price would have definitely influenced the decision to re-work the agreement and get rid of the non-compete fee of Rs 50 per share,” said an analyst who did not wish to be named.

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